You might have heard that the federal government has come through with changes to the rules for Investment Canada reviews of foreign takeovers.

The changes are kicking in quickly. Most of the new rules take effect April 24. Changes to the timeline for “national security” reviews are immediate. The government is boosting the time period for such reviews to 200 days from 130 days.

The big headline emerging from these changes is that the federal government is raising the threshold for automatic reviews to $600 million from the current $369 million. The threshold will rise to $800 million in 2017, then $1 billion in 2019, and then be indexed annually thereafter.

Sounds straightforward, right? Not really. The new threshold is to be calculated using an “enterprise value” formula, while the old number was generated by “book value.” The situation will vary with each company, but it’s debatable whether this change of methodology will actually result in an practical increase in the threshold for automatic reviews.

Some corporate lawyers are telling me that the Investment Canada changes will lead to a more complicated and less certain regime. That’s an ironic result, because once upon a time, it was hoped that boosting the review threshold would lead to a simpler, more competitive system.

“You add it all up, and you ask, why is this better?” says Michael Kilby, a partner in the competition and foreign investment group in the Toronto office of Stikeman Elliott LLP. “The idea was to reduce the regulatory burden and keep things simple. I would say we’ve possibly increased the regulatory burden, certainly for the uninteresting transactions, and we’ve made it more complicated.”

Back in 2008, the Red Wilson “Compete to Win” report recommended a boost to $1 billion for the threshold for Investment Canada reviews of proposed foreign takeovers in non-cultural sectors. This was part of a plan to increase “transparency, predictability and reporting” in the review process.

The new formula adds some complexity to the mix. Enterprise value is designed to attach a more recent market value to the target company. You get the enterprise value by taking a company’s market cap or equity value, adding long-term liabilities that a bidder would assume upon obtaining control, then subtracting operating liabilities and cash. As with any accounting exercise, the process can involve more art than science. Most of the time, the resulting number will be so far below or above the Investment Candaa review threshold to matter which method is used. In those instances in which the number hovers just above or below the threshold amount, this could be a headache. Companies will miss the old method of simply looking up the target company’s book value.

“While the changes should achieve the government’s objective of decreasing the number of investments subject to review, the determination of whether or not an investment will be reviewable will become more complex,” write Omar Wakil, Rebecca Moskowitz and Marina Chernenko of Torys LLP in a note on the changes.

“It will likely take some time to sort out how the precise details will work in practice,” adds Brian Facey, chair of the competition, antitrust and foreign investment group at Blake, Cassels & Graydon LLP. Fair market valuations are not without precedent, he adds: Other jurisdictions use them as triggers for anti-trust reviews, and they’re also used in other practice areas, such as tax law.

Generally speaking, Mr. Facey believes there will be few circumstances in which a company will be so close to the threshold margin that its status under the new rules will be unclear. If that happens, the government will likely ask for clarifications, he suggests. “I expect that there will be a number of instances where Investment Canada officials will want to understand the rationale behind fair market calculations and the factors that make up the final consideration offered for the company.”

When dealing with publicly traded targets, the market cap is to be determined using the average closing price on the company’s principal stock exchange during the most recent 20 days of trading before the first day of the month that the application is filed.

Bidders may use this relatively complex formula for strategic advantage, lawyers from Osler, Hoskin and Harcourt suggest in a bulletin. “The time period for calculating the average share price used to calculate enterprise value will be determined with reference to the point in time at which an ICA filing is made rather than when the transaction closes. In other words, the amendments permit an investor to file a notification if at that time the enterprise value is below threshold, thereby ‘freezing’ the non-reviewable status of the transaction for that investor.”

On a more practical note, perhaps the biggest change is the government’s decision to increase the disclosure requirements for all foreign investors making bids, and not just those seeking approval for transactions above the threshold level. The additional data gives the government access to better information on investment trends and trade flows. But it does add to the regulatory burden placed on foreign bidders.

“That is one of the lesser publicized aspects of the new rules,” Mr. Facey says. The relevant information forms are very basic, but must now be completed even for fairly small and routine transactions, he says. “The new forms suggest that government is quite focused on confirming which transactions involve SOEs or may raise national security concerns.”

This is worth remembering. The big deals, in which a foreign bidder must file applications to convince the government that the takeover is of “net benefit” to Canada, attract a lot of attention. But they’re actually quite rare, at least relative to the number of non-reviewable transactions for which only notification is necessary. In the fiscal year ended 2014, the federal Minister of Industry considered 11 applications under the Investment Canada Act, while 655 notifications were filed. Those numbers are quite typical. In 2012-23, there were 18 applications and 664 notifications, and in 2011-12, the numbers were 15 applications and 696 notifications.

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